E52 | Why Having Equity in This Market is Dangerous

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Your equity might be your biggest liability. In Episode 52, we pull back the curtain on the exact strategy we're using to sell properties, eliminate tax bills using bonus depreciation, and redeploy trapped equity into multiple cash-flowing assets — all while AI quietly replaces the humans doing these deals. If you've ever wondered whether holding your appreciated property is actually costing you money, this episode will change how you think about your portfolio forever.

What You'll Learn:

• Why a doubled-in-value property may be your worst-performing asset
• How to calculate Return on Equity and why it matters more than cash flow
• The bonus depreciation strategy that legally eliminates capital gains tax
• How to combine 1031 exchanges with bonus depreciation for tax-free cash
• Why AI is already closing real estate deals with zero human involvement
• The assumable mortgage strategy almost no buyer is using
• When it makes sense to sell — and when it absolutely does not
• How the Big Beautiful Bill changed the entire tax planning game
• The equity velocity stack: how to turn 1 property into 3
• Why the next few years may be your last best window to build real wealth

Resources Mentioned:

• Skool Community: https://www.skool.com/brokemillionaires/about
• Dan Martell: @danmartell

⚠️ Disclaimer: This podcast is for educational and informational purposes only and does not constitute financial, legal, or tax advice. Always consult a licensed CPA, attorney, or financial advisor before making any investment decisions.

Transcript

SPEAKER_00 0:00

If your property has doubled in value, it's probably your worst performing asset.

SPEAKER_01 0:04

That's kind of what we're evaluating right now with the properties we have because a lot of these properties that we have have doubled in value or even tripled in value. And what happens is it gets to a point where you can only pull out up to 80%. So you got to refinance everything. And that's hard to do right now. We've got a lot of like trapped equity that we can't get. Some of these properties you might still be leaving several hundreds of thousands of dollars locked up in there that you can't go to work for you. The American Dream is to buy a house, pay it off in 30 years, and you own a house. So if that's your goal, that's great. We view homes differently. But one thing that come to realize is that you know, wealthy people tend to optimize for return on equity, whereas most investors are always looking to optimize cash flows like how do I get the best cash flow? And I think we got caught up in that a little bit, like just making sure we're covering the payment and creating extra cash flow. And that sounds good, but when you look at your equity that you have, and return on investment is one thing, gotta start looking at your return on your equity. That's really your opportunity cost. You know, you gotta look at what I could do with this equity if I pulled this out of the home and deployed it elsewhere into other investments or bought other properties. And so that's kind of where we're at is you know, we're looking at optimizing our return on the equity.

SPEAKER_00 1:12

Welcome back to The Broke Billionaires, where we document our daily struggles and building wealth while raising a young family. Join us as we talk creative wealth building for everyday people and couples that are struggling in a down economy. I'm Lauren.

SPEAKER_01 1:24

And I'm Joshua Masari, and we'll be your host.

SPEAKER_00 1:29

Welcome back.

SPEAKER_01 1:30

Welcome, welcome.

SPEAKER_00 1:32

How's it going?

SPEAKER_01 1:33

It's going pretty good. We're back uh back in the studio. We um guess we didn't take a break. We did an interview last week, virtual interview, but back in the studio for ourselves, and we got a few guests that we're getting lined up for uh coming weeks, and we'll see how that plays out. And yeah. So what are the updates that we have for now?

SPEAKER_00 1:59

Let's start with the never-ending roof situation. It's it's so close. We're so close.

SPEAKER_01 2:05

So we've got this property we've talked about several times that has a cedar shake roof. We couldn't get insurance, we had to get super expensive out-of-state insurance on it or not admitted insurance, and it was just costing us an arm and a leg. We have a path forward on this, and I think we finally figured it out. We had to get very creative. Uh we'll break this down fully, probably a full episode just breaking all this down, but we are almost there. Tomorrow, the roofers start the demo with ripping it off. So we are very close to getting this done. And as soon as that's done, we are gonna get our regular insurance back and save about $13,000 a year.

SPEAKER_00 2:43

Sounds really nice.

SPEAKER_01 2:45

So we'll uh we'll see how that plays out. But we are very, very close. We've been talking about it for a long time, but we are actually there.

SPEAKER_00 2:53

We can see the light at the end of the tunnel. Yeah, 24 hours in terms of starting it.

SPEAKER_01 2:57

Within 24 hours, there should be no roof on there. It should be all torn off. Then we just got to get them to put it back on. But that's another story.

unknown 3:04

Yeah.

SPEAKER_01 3:05

So see how that plays out. Um we we are another update I want to talk about is how we're implementing AI into our businesses. And I feel like this is changing so, so rapidly. Like we've been implementing this for the last few months into the print business with an AI agent to basically take emails from people, find their previous order, like process the orders and take care of it for them. And I feel like in the time that we started it, we're in the testing phase this week and rolling this out, hopefully in the next in the coming weeks. But I feel like it's already like antiquated software. It's already, there's already new stuff that's like coming and it's like just like it's everything, it's evolving that fast.

SPEAKER_00 3:49

Um Does this like scare you at all?

SPEAKER_01 3:52

It should. It should scare anybody.

SPEAKER_00 3:54

Yeah.

SPEAKER_01 3:55

So I saw a chart um the other day that showed 16 industries and it broke down which industries that AI was going to infiltrate and replace jobs in. And out of the 16, it was like 14 or 15 of them were like almost fully replaced with AI. And then it showed so it showed this chart and this like graph chart that went or a pie chart that went out. And there was like one section, which was was the food industry that that wasn't getting replaced by AI. But I feel like it's probably going like farming and stuff, I feel like is gonna have more and more AI implemented into it. But it was saying that that was not gonna replace jobs, or at least not as much. You know, sales and marketing and um, you know, legals, attorneys, and and even healthcare, like all these jobs getting replaced with I AI. And then it showed in the middle and read how much AI has already taken over, and it was like almost nothing. So it's like, this is what it's gonna be in two years, and it hasn't even scratched the surface yet. So that's that's very scary. Yeah. I I watched a call with uh Dan Martell over the weekend, and it was a very interesting call. It was actually a live call with Cassie Warren from our group. Um and it was a very interesting. Dan's real big on AI, and so like the the everything changes weekly. He's always updating on what AI programs are out now and which ones to use and which ones aren't worth it. But so Dan Martell is starting to get into real estate now because he's a software guy. All of his money is tied up in software, and that's kind of where he's been, but he's he's looking to move some of his wealth over into real estate. So he's doing something right now where he is buying a 36-unit apartment complex, and he's negotiating, looking at the finances, and he's got a team put together for this. And the team is, you know, reviewing the financials and going back to the seller's agent and saying, you know, you guys have made a mistake on your financials, this is here, and then basically using that and leveraging that and negotiating down based on incorrect financials and just all this, all this anyway. He's got this team that's putting the whole deal together, negotiating it and gonna close it. Once it closes and he signs, he's gonna uh he hasn't even told him this. There's not actually anybody doing this on his team. It's all just AI that he built. So it's all like literally all these AI agents. You know, an AI agent is not a real estate agent, but an AI agent that just goes and does all this research and takes the data, the financials, processes it, finds mistakes. It's all just AI working together as his team to do this real estate transaction. And so he's completely replaced a traditional realtor and you know, CPA and all these people that would normally look over a deal, and it's all 100% AI. So once he does this, he's gonna take this and probably package it up and sell it as a product. Um, but it's funny because the other side probably has no idea that they're just talking to a computer and the computer's coming back and saying, No, you're wrong. We're gonna, you know, it's yeah, it's insane. So wild. Uh the other thing that he which is this is kind of this should kind of scare you. Dan is, you know, big SaaS guy, big software, big AI. Um and he has a huge content team. Like he's probably one of the, one of the top content creators in terms of, you know, maybe not like Mr. Beast, but like in in terms of the industry he's in, he's probably one of the top, has the biggest team and spends the most money on content. He doesn't spend any money on ads, it's all organic. But he has probably one of the biggest, most well-trained teams for this. And he just told his team, we are getting rid of all of you. Not in a like, you're fired, but like you're going to get replaced, and we're implementing AI now, building out AI now. So, like, get on board and and make yourself valuable and get get in because you are going to get replaced. So I'm sure that's pretty scary for the people that aren't ready for that shift. Um, you know, he has his main, his main guy, Sam, who's keeping on, but Sam's now taking their entire content workflow and automating it all with AI. So, which I'm actually looking at doing for ourselves because I spend, even though we have editors now, it's still the workflow is still a lot of manual work. And so I'm trying to figure out how do I build an AI agent to we record and then just upload it and then it does everything that I do from start to finish, sending everything to the editors, but with all the notes and everything figured out and just like does the whole thing. So it is scary. It it if you're like if you are an employee, yeah, you should be scared because they're like it's going to replace a lot. Um so I think the way you get around that or the way that you combat that, you know, for the people that are just like resisting AI, because there are still people resisting AI and just like, I'm not gonna give in and that, you know, I'm whatever. Like you are going to get left behind.

SPEAKER_00 8:51

Like when I resisted the iPhone, didn't want to give up my blackberry. I got left behind for a while.

SPEAKER_01 8:57

Like, and I and I'm making major shifts. And I'm just thinking already, like, how do how do we make shifts in our businesses to not get left behind because it is going to be a very quick change? Because now it's no longer, and even like coders and engineers, they say, like, oh, the engineers that do all the coding are always gonna have jobs. Like, they're getting laid off right now. Facebook just laid off like 10% of their workforce last week and replaced those people with AI to do the same job. So like these software companies are at the leading edge of this and they're laying off humans, replacing with AI. So it's happening very quick. Um, you know, AI is now building AI. So if you want to build an AI agent or build a website or something, you don't have to have a developer do that anymore. There's programs that cost $20 a month that will do all this for you very quickly and instantly, like literally like within 10 minutes. I was on a call last week, uh, MTR call, and people were asking how to build websites. Like, how you know, where do I go? And people are like, oh, go to Wix, go to this and go to that. While we were on the call, one of the guys at the very end um posted a website that they had just finished for FIFA World Cup. Like they did a landing whole landing page for this. I took his website, I dropped it into my AI agent and said, build me this website, replicate this website with our branding, our logos for our area and everything. And within 10 minutes, I was trying to do it before the call was over, but it was like five minutes after the call ended. But it literally created a whole landing page, looked great. Someone that had spent probably hours and hours building this and within 10 minutes had the same bones of the website, looked the same. It even made pictures. So they had theirs for Metlife Stadium on the East Coast in New Jersey. And I said, build it with, you know, for uh FIFA World Cup around SoFi Stadium. And it made an image using Nano Banana, created an image as the backdrop of the website, made this gorgeous looking website, rendered all these photos and within 10 minutes. And the cost on it was probably like two bucks that it took out of my account.

SPEAKER_00 10:56

I mean, I think there's so many positives with AI, but there's also some things that are just a little terrifying.

SPEAKER_01 11:02

If I mean for if you're if you're an employee, that should be that should terror absolutely terrify you. And as a business owner, it scares me too, because a lot of middlemen are going to get cut out. And this is one thing that Dan was talking about on this recent call. Um, you know, real estate agents. Like I think there will always be a place for them, but it is going to weed out a lot of real estate agents. There was already uh just in the news last weekend, there was a guy in in Florida that sold his house, just a homeowner sold his house with a with an AI agent. It did the whole listing, the marketing, everything, sold it, took it to the title, so it got all the way to the to the title company for the closing without anybody touching it. Crazy.

SPEAKER_00 11:41

Scares me. Did you ever watch Smart House growing up? Remember that movie? I I sounds familiar, but uh So this family, I don't know what year it was supposed to be. This family moves into this like first smart home and the home like does everything for you, right? Everything our kids talk about, it's like they make you smoothies, they clean up, they do all this, but then the house turns on them. What have I always said? That's what like scares me with all this. No, I think and I think it's completely can turn on you.

SPEAKER_01 12:03

Yeah, I think that can happen. I think it's very so there's there's a lot of precautions, but there's only so much. But it's kind of like a, you know, what do you do? Do you go along with and get left or you get left behind and stay away? Like, what do you can go live in a cabin in the woods and live off the land? That's the other option.

SPEAKER_00 12:17

But sometimes that sounds nice.

SPEAKER_01 12:18

Yeah, a lot less stress. But it's just one of those things that's like, what do you do?

SPEAKER_00 12:23

Yeah.

SPEAKER_01 12:23

You know. But you know, anybody that's in like a middleman distributor, if you're you know, a realtor, um, you know, we have a distribution company with the print. So we're trying to figure out how do we implement AI to like handle everything, process everything so it's faster, gets you know, I'm working on building an AI agent. So when people call or email, they can go to the website or by email it'll send back suggestions for products. So somebody says, hey, I need this or that. It'll automatically find the best fit for whatever event they're doing. And because that takes a lot of time. That's the part that takes the most time in the business, is doing all that research. So if we can automate that and get them instant answers, they don't have to wait a day or two. We're just getting them instant answers, instant quotes right away. So nobody I I know nobody else in my industry is doing this, but people that don't get on board are going to be left behind quickly. So I'm I'm scrambling, I'm really scrambling because it's I see that this is where everything's going and it's going to be a problem. And I'm scrambling to try to get ahead of the curve because I know that you're gonna get left behind really, real fast because the curve of AI is just going like this. Like AI building AI now, and it's just like it's rapidly like it's just crazy how fast everything is coming out now and all these new programs that didn't exist yesterday and AI literally wrote it overnight, and now you got a new program that does something else. So yeah, it's it's scary, but I think it getting in the forefront and creating AI to generate an income for you is gonna be huge because if you don't do that, you're not gonna have an income. And you know, they talk about going and having taxes on companies that use robotics and stuff where they're gonna have to get taxed for not hiring people, and that's gonna go into a pool and it's gonna be a universal income that everybody just gets a set amount, which it's not going to be much. It's not gonna be, you're not gonna be able to build wealth. So I've actually heard this that we only have a few years left to really like build wealth, kind of what we're doing now. It's gonna be a lot harder in a few years because you're not gonna have jobs, so it's gonna be a lot harder to create the income. So figuring out a way to have AI generate income for you now, like get ahead of that curve and start generating income using AI before before you get too far behind. So Yeah.

SPEAKER_00 14:31

Nothing like a nice anxiety spike first thing in the morning, huh?

SPEAKER_01 14:34

So if you have any ideas, like definitely throw them out there because we we need to be just getting our mindset thinking that way. Because if we wait for two years, it's gonna be too late and everything's gonna be already like ahead of us and we'll be left behind. So I think you just you gotta get ahead and gotta be on that forefront and be thinking that way. How can AI create income for you? Everybody's starting to use ChatGPT and AI to make themselves more efficient. I think people are realizing this really helps this really has a value. But making that shift to figure out how to use AI to actually generate real income is where it's going to be at. And Dan talks about this too. Like that's where that shift, that mental shift needs to happen is you need to to create the AI to generate real revenue for you. So the world's not ending, but it's changing real fast.

SPEAKER_00 15:27

Yeah, that's for sure.

SPEAKER_01 15:29

Yeah. What else we got? That was heavy. We'll we'll probably do a full episode on it once we have some of these other programs up and running. We'll we'll do an episode on that for sure because we are implementing it so heavy into our businesses. So um, you know, there's still gonna be manual stuff that has to be done, but then again, you got robots coming right down right behind all this stuff. So uh, you know, Tesla just stopped making the Model S and Model X to their flagship vehicles that made Tesla who it is. They just stopped. They're no longer making it. And the reason is because they are using that factory to start building robots. So they're like these hundred thousand dollar vehicles that made Tesla who it is is not where the future is. And we will make a lot more money shutting all this stuff down and just starting to build robots.

SPEAKER_00 16:15

No.

SPEAKER_01 16:17

So our kids, our kids, it's funny because our our our two-year or four-year-old now, yeah, he's four, um, keeps asking or keeps saying, I wish we had a robot to do the dishes. I wish we had a robot to clean up. I wish we had a robot. And I don't know where he gets. I watching something.

SPEAKER_00 16:33

It's gotta be something he's watching because we don't talk about he does we don't talk about that when he was awake because I know he would probably get really tired.

SPEAKER_01 16:39

You're not watching the Jetsons, I don't think. Because the Jetsons that that was the thing, you know, back in the 60s or whenever that came out.

SPEAKER_00 16:45

Yeah.

SPEAKER_01 16:46

But that that is like that is the reality where we are now. You got AI doing all this stuff behind the scenes, replacing jobs, and then the manual stuff is now going to be getting replaced. And these robots are not that expensive. For 20 grand, you can get a robot that works for you. I don't know how long it takes to charge them, but you know, if you get 12 hours a day of it just constantly working, that's a pretty huge efficiency advantage for businesses. So I think we're gonna start to see a lot of that, which is crazy. It's like watching Star Wars or something, like all the humanoids walking around like that is going to be a our reality in the next couple years. Heavy stuff. Heavy stuff. All right. Okay. Just a quick disclaimer the information shared on this podcast is for informational purposes only and should not be considered as financial, tax, or legal advice. Always consult with a qualified professional before making any financial decisions. Your individual circumstances may differ and require specific strategies not discussed here. Now let's get back to the show. So yeah, switching gears a little bit though, what we wanted to talk about today is we've been re-evaluating our portfolio that we have, our local portfolio. And you know, we've talked about these houses where we, you know, fix them up, we move into them, and then we tap on the pull out equity and then roll it into the next house or fix it up. We have gotten to the point where we have so much equity in these properties. And I think that, you know, like you were saying earlier with the equity. What were what were you saying earlier?

SPEAKER_00 18:31

That if your property has doubled in value, it's probably your worst performing asset.

SPEAKER_01 18:36

Yeah. No, I and I and I totally agree with that. And that's kind of what we're evaluating right now with with the properties we have, because a lot of these properties that we have have doubled in value or even tripled in value. And what happens is it gets to a point where you can only pull out up to 80%. And then if you got second and third and third positions, you usually aren't going to do that. So you got to refinance everything. And that's hard to do right now. And so we're in positions where we've got a lot of like trapped equity that we can't get. So even if you have you're able to get the full 80%, you know, some of these properties you might still be leaving several hundreds of thousands of dollars locked up in there that you can't go to work for you. Now, I understand like like the, you know, the American dream is to buy a house, pay it off in 30 years, and you own the house. So if that's your goal, that's great. And that's that's one way of, and that's a good, safe, safe way of doing it. But what we do is these are not, this is not our home. This is not our forever home. We view homes differently. They're an asset for us, they're building wealth and then they're generating income. Uh so what we're doing is evaluating the equity that we have in these properties. And, you know, most and what we've done is we've optimized for cash flow in these, which is great. We've, you know, done the midterm rental strategy, which has gotten us higher rents and we we've done really well with it. And so we're getting good returns as far as the cash flow. But one thing that that we come to realize is that, you know, wealthy people tend to optimize for return on equity, whereas most investors are always looking to optimize cash flow. It's like, how do I get the best cash flow? And I think we got caught up in that a little bit, like just making sure we're covering the payment and then creating extra cash flow. And that sounds good. And these are high, this is an expensive market. So it's a decent, like these are high dollar amounts. So it sounds really good. But when you look at your equity that you have and return on investment is one thing. Like if you're putting, you know, $10,000 into a property that you buy for, well, just say you put $20,000 into property buy for $100,000. What's your return on your investment? Which your investment is only $20,000. It's not the $100,000. The other $80,000 is the bank, but your money is the $20,000. But what happens is that if that value doubles to $200,000, you got to start looking at your return on your equity because you might only have $20,000 in there. So you're getting a good return on your investment, but you now have $120,000 tied up in that property, which is your equity. What is your return on your equity? When you do your that's and the return doesn't change. The actual cash flow is the same. But when you're taking that and using that and dividing that by the equity, the $120 rather than the $20,000, the numbers don't look as good. So that's really your opportunity cost. You know, you got to look at what I could do with this equity if I pulled this out of the home and deployed it elsewhere into other investments or bought other properties. And so that's kind of where we're at is, you know, we're looking at optimizing our return on the equation. And then in conjunction with that, like what's our tax strategy? So when we run the numbers, what doesn't look so good when we're looking at all the equity that's tied up in these properties, it's like some of these we're getting like two or three percent, even though it's a a decent amount of cash, uh cash flow, sounds good. You know, it's still like two or three percent, which is not great. If you look at the original first property we bought, it was like seventeen thousand dollars down many years ago. And so the return on that is great. But now there's so much equity tied up in this that we we can't even get because we've kind of outrun that, you know, this property has tripled from what we bought it for 15 years ago on this this one I'm talking about. So that's kind of where you got to reevaluate and be like, okay, if we were to sell this to be able to unlock the rest of that event that equity, and then you can take that equity and go buy multiple properties. Now you got multiple properties instead of just one. And then you start looking at your return on your investment at that point.

SPEAKER_00 22:35

So then explain to people who don't maybe understand like how are we working with taxes with that? Because that's obviously such a a key point that we are very aware of.

SPEAKER_01 22:49

Yeah. So I think that one of our big things is that with wealth building is creative tax planning. And not everybody this is the afterthought, I think, for for a lot of people, for a lot of investors. You know, we hear people flipping and they just flip and pay the taxes. Like they don't think about how much they don't they they look at the the revenue as their or their pro initial profit and think like, oh, that was a good return, but then they pay half of it in taxes and like, no, your turn just got cut in half because you had to pay half the taxes. So how do you optimize that and not pay those taxes? Well, one of the things that happened just in the last year is with the big beautiful bill, they brought bonus depreciation back. So this opens up a whole new plan and tax strategy to be able to defer these taxes. So the way we can look at this is so one of the things we're looking at is with the tax issue we have, we're gonna have huge tax liability when we go to sell these properties. Um, because of the bonus depreciation that now came back, we're looking at being able to roll this over into new property. So what we're gonna have to do is we're gonna have to buy more properties uh and do a cost segregation study, and then we'll be able to take bonus depreciation against this. This actually came out last year and was actually retroactively uh put in place back to January of last year, but it didn't pass till the end of last year. So you kind of already had to have this plan in place. So this wasn't something we would have had time to be able to even take advantage of last year. But with this year, we've got time to plan it. And we're here in March. So we've got time to like plan our strategy out what we're gonna do, how we're gonna move the money, and and be able to, and we might even be able to do a combination of, you know, 1031, because with a 1031 exchange, you can roll it over into another investment property and you can defer those taxes. Uh, with the bonus depreciation, you can actually bury it. And you still have to keep the property for that amount of time, which is usually like five, seven, 10 years for whatever the depreciation portion is on the cost segregation study. But I think using a combination of that, we'll be able to pull this money out, use maybe a third of it to use as down payments towards other properties. And then we kind of start the clock over on those ones. And then we're getting a better return on our investment or better return on the equity because now we've got the equity going out to three properties or however many it is. And then we've also got cash that we are now have cash, like tax-free. So we're able to pull that out tax-free and we can deploy that in either more properties or other investments and just create additional income streams for ourselves. So this was not something we could have done before, but now this is a new strat, our strategy has has shifted because of this new tax bill. And so we're pivoting our strategy. We're still gonna do the same thing, but we're just gonna start the clock over so we don't have so much equity tied up in a few properties. It'll just be spread out over more. And then, and the and what that does is it's kind of like the velocity of equity, which means the more when you move your equity around, you take it, you split it, you put it into three properties instead of one property. Now you got three properties and you're leveraged, you're you're at a better leverage point. So you're not putting as much into each deal. But when the you know, inflation happens or the the market goes up, you're getting whatever the appreciation is on that times three. So you're actually able to increase the velocity of your equity gains, which is a kind of a it's a lot to take in. But if you like really write it out and break down the numbers, you can see like how powerful this can be. And I think I think we just kind of got stuck with like, oh, we have all this equity and trying to maximize our income, but not realizing that we could actually be further ahead by doing it this way.

SPEAKER_00 26:41

I was gonna say, because that's obviously our plan has we've always said, you know, never to sell. And um what was it that was it the bill passing that made you kind of really sit down and look at these numbers?

SPEAKER_01 26:53

Well, we've never said never sell. Like our out-of-state properties we hold for about five to seven years, and we do this. We already do this with those properties. We we hold them five, seven years, and then we sell them, take the equity, and then we'll we'll deploy that into other properties. And so that's kind of like the cycle. With our California properties, it's a little different because they're very difficult to get. It's harder to get. So I think that's kind of our mindset. And we have very lower interest rates. So the ones we're actually looking at selling two properties that don't have as good of interest rates uh and have a lot of equity in them. The one that has a really good has like a 2.87%, like it would be really hard to sell that and let that go. So and that one, we've been able to tap into the equity on that one pretty, pretty well. I think at some point, though, it may get to where that one, if it if it keeps going up in value, at some point we've got to look at like, hey, like we could get three or four properties if we just sell this one and probably be better off. So it may still and I don't think this works everywhere. I think in California, because of the appreciation we see here, it's an appreciating market. So I think that's where you get more equity locked up and they're higher dollar amount properties. You know, the properties are out of state that are a couple hundred thousand dollar properties, and you might have, you know, $40,000 of untapped equity. It's not going to go as far and not going to be able to buy as as big of an asset. But when you, you know, here where properties are 10 times more, it all of a sudden becomes a big number. And so I think just making that shift mentally and being able to let go of these properties we're holding, because in reality, we're not really giving up properties because we have to buy more offset the taxes. So we'll probably end up with more properties at the end of the day. They just won't have as much equity in each one, but they'll still be performing, generating income, paying themselves down, and they'll still build, build equity. It's just kind of restarting the clock. So it's not all in one basket.

SPEAKER_00 28:38

Yeah.

SPEAKER_01 28:38

So it actually makes us more diversified. We'll be more diversified. And you know, if something happens, God forbid a house burns down or something. You know, obviously we have insurance, but that's still going to set you back. But now instead of only having three properties here, we could end up with like, you know, nine or ten at event at some point or whatever. So you just it spreads out your risk, I think, too.

SPEAKER_00 28:56

Yeah.

SPEAKER_01 28:56

You know, you can get into different neighborhoods and have different exposure. So I I think it's definitely worth looking into if you if someone has that sort of situation. Um, but yeah, I mean, hold because holding a property that has a really low return on equity is, you know, it's uh you're really underperforming when you look at the numbers. And and keeping that, you're accepting that that is an underperforming property when you look at the opportunity cost of what it could, what that equity could be doing for you. So I think that's kind of where we're at with something we've been talking through. And I think we're both like see this opportunity. And again, this wasn't as viable of an option before the bonus depreciation came back. You know, and I want to be clear, not anybody can get bonus depreciation. Like you have to be a real estate professional. That does not mean uh uh that you have to be a realtor.

SPEAKER_00 29:45

Licensed. Yeah. Yeah.

SPEAKER_01 29:46

You don't have to be a licensed realtor, but you have to be involved in your real estate portfolio. You have to you have to do this more than than if you have active income, like a W-2 job, you have to be doing this more than your W-2 job. There are certain hours criteria that you have to meet, like you have to be material materially involved, like you actually have to be active in this business. Um, there are some people, like if you're married, you can have one spouse that does this and one that doesn't. So if if one person, one of them spouses a real actual realtor, and you know, you're a real estate agent and that's your full-time job, you automatically get the real estate professional status. And then, you know, the other spouse can be, you know, working a W-2 job, something totally unrelated, but you can still do this strategy because that one person has the real estate professional status and you file as long as you're filing jointly. So that's a good strategy that a lot of couples have used is by just having one spouse that qualifies for that because it'll offset both incomes. So yeah. Getting heavy on tax stuff, which I know you're you love.

SPEAKER_00 30:45

Love it. No, I think it's been, I mean, I'm excited about this opportunity, but it has been a bit of a pivot from obviously what we thought we were doing. And so I think just you know.

SPEAKER_01 30:57

Well, we didn't expect the values to double in the last five years. Like it's been great and we've been able to tap into that and bought more properties. But like that our plan, you know, we did bank on we know, we were like looking and doing this for appreciation, but we never thought it was gonna double. And a lot of that's a lot of that has been because of inflation. So if we can lock this, and the other thing too is if we do this and pull this money out, we're kind of locking in our win. And if the market did cool off and values did drop in our area, now we're not losing equity because we've already taken that out, locked in that win, and we'll redeploy that. But since we won't have a lot of equity in each of these newer properties, if it does go backwards and it's underwater, now it's the bank's money that's underwater, not ours. So the property is still gonna cash flow and still pay it for itself. And, you know, it'll go through the cycle and then 10 years later, you know, we'll be have equity in it and we'll probably be in the same situation or hopefully. But I I think it's just a safer, safer move to be able to pull that equity out and have that working for us elsewhere and kind of diversify our and we'll be able to create more income than we are right now because our return on our equity is so low. We're not really creating much cash flow that is actual income for us and our family. This will allow us to take that equity, move it into more, you know, income-heavy investments and actually start generating income passively, which I'm actually really excited about because that's something that we've been focused so heavily on building equity, which to get where we needed to get to this position, we had to do that the last five years. And we've done a really good job of building up that equity. But now it's time to like, we've been doing so. We talked about this. We've been sowing and and doing all this. Now it's time to like reap what we've sowed and pull that equity out and start taking the benefits and creating income from that. So that's that part's exciting.

unknown 32:42

Yeah.

SPEAKER_00 32:43

Absolutely. Okay. I want to go back to for a minute when you were talking about bonus depreciation. For those that don't know what that is, break it down a little bit more.

SPEAKER_01 32:52

Yeah, that's good. So I know there's a lot of misinformation about this, and people just think, oh, you can just take bonus depreciation. It's not that simple. Like I mentioned before, you do have to qualify as a real estate professional. So this is, you know, these are all strategies that that we're doing and other people have done, but you should you shouldn't just do this without talking to somebody. You need to talk to your CPA. Um, you know, all the information, everything we talk about on the podcast, you should always run by, you know, financial advisor, CPA, uh, you know, your, your um uh if you if you're doing mortgages stuff, you're whoever's doing your mortgages, like uh, you know, your attorney. These are all all things that that we talk about is is really just meant for education. But these are strategies that are real and that you can utilize them. So tax planning is big. This is not something you can do at the end of the year and you sell in December and then think you're gonna take bonus depreciation because you have to buy the next house in December. And if you just buy it in before the end of the year, yes, great. But if you don't have real estate professional status built up for the year, you can't do that. So this is something that takes requires a lot of planning ahead of time. You know, we're talking to our CPA to make sure that we're doing everything correctly to be able to take all this depreciation. Um, but like an overview of how bonus depreciation works. So normally with with real estate, you'll depreciate the asset over 27 and a half years. And it's the buildings, it's the improvements on the property. Land is never doesn't depreciate. So let's say you've got a property that's a million dollars. And let's say the property itself is worth 300,000. And the county does kind of figure out what the land is worth. So let's say the land, it's on your tax bill, it breaks it out. Let's say the land's worth 300,000 and the property that's been built on or the home and buildings and improvements are $700,000 that make up that. So normally your CPA would be like, okay, $700,000 is your depreciable debt tax basis for this property. You take depreciation on this over 27 and a half years. So you can hold that for 27 and a half years, you get depreciation every single year against your income on that property. And that's why real estate is such a, you know, such a tax advantageous asset, because even though you're generating income, you're offsetting that with depreciation. Even though the value keeps going up, you're still depreciating it per the tax code. So at 27 and a half years, you kind of have to sell at that point or do something because you lose that depreciation. So it doesn't even make sense to hold properties that long because you start to lose that that tax benefit. But with bonus depreciation, what this, what this requires or what this entails, is you do a what's called a cost segregation study. And what that means is there's companies that that specialize in this. They'll come in and they'll say, okay, so this building is worth $700,000. We're gonna um take a look at all the materials, all the the, you know, the plumbing, the electrical, the HVAC system, all these things that you would buy as depreciating items. And they will do this whole study and be like, okay, this is the value of all these items. So it comes out to let's say, you know, $300,000 and say, okay, $300,000 and all your materials and everything that you can use and qualify for this, this cost segregation study. Instead of taking 27 and a half years, now you can take all these individual item material items and say, okay, if you know, if you replace an item, you actually depreciate on a different schedule than your 27 and a half years. If you replace an HVAC, usually it's gonna be like five years or seven years or whatever it is for that specific item. So they'll just do that all up front and be like, okay, these are all the items that you have in materials. You can depreciate this over, let's say seven years. Let's say it's a seven year cycle just to make it easy because it's it actually broke, it's broke down different items, have different like five year, seven year, 10-year. But let's just say it's seven years. So they say, okay, you have $300,000 worth of items that you can depreciate over seven years. With bonus depreciation, you can actually front load that and push that all to year one. So that's why it's called bonus. Um, you can take take that in year one. So what that means is you can take that $300,000 depreciation and just put it all in year one. And then instead of having that over the next seven years, you get nothing on that over the next seven years. So you do have to hold the property for that seven years to fully realize that depreciation. If you sell it before that, then the IRS is gonna do what's called recapture and you're gonna have to pay some of that back. Um, but the other portion of that is remember, the property was originally the buildings were worth 700,000 and we were only taking 300,000 on bonus depreciation. So there's a $400,000 difference. That $400,000, you still take that over the 27 and a half years. So you're still getting depreciation each year, just not as much as you would if you didn't take the bonus depreciation. So why would somebody do this? Well, we were just talking about if you have a property you sell and there's a lot of tax liability, this is how you bury that tax liability. So that $300,000 in bonus depreciation, if you sold a house for a million dollars, let's say you had, let's say you had another house. Actually, let's say you had another house that you bought for $300,000 10 years ago and you sold it for $600,000. So you had $300,000 gain on it that you would be taxed on normally. That $300,000 is now going to offset that gain and there's no taxes. That's how this becomes really powerful is you'd make that tax just disappear. So, and when you when you sell that first house and you get that $300,000, you don't have to take that full $300,000. Uh in a 1031 exchange, yes, you do have to roll all that money over. But with this strategy, you only need to put 20% down. So if you're doing 20% on a million dollars, that's only $200,000. So you put $200,000 into this million dollar property and you get a $300,000 tax write-off. And you sell the $100,000 that you're holding of tax-free money and you have a property that's worth almost double of the previous one that you had. So now when equity when appreciation happens, let's say appreciation goes up 10% instead of 10% on a $600,000 property, you're now getting 10% on a million dollar property. Or in our case, where we're doing it times three, well, let's say we're buying three houses, three smaller houses instead of a big one, you're you're multiplying it by three, not just by one. So that's where this becomes really powerful. And you can see the velocity of equity starts to snowball and just increases your overall equity over time as you do this strategy. So they say, like, and I've heard this before, like you can sell, create a tax problem, which this would do, but then you can erase it with depreciation. So this is just a tool that is now available to be able to use for that strategy.

SPEAKER_00 39:18

Would you say this is in place of a 1031?

SPEAKER_01 39:22

So 1031, well, we might do a combination of both because these are rental properties. So we have the ability to be able to do both. So what I'm looking at doing and talking to the CPA about is whatever portion that we're using as our down payment, can we use that portion as a 1031? And then we get the bonus depreciation to kind of help eat up more of this tax liability to get there without having to deploy as much capital back into real estate. Um, but it's just different. So the 1031, you don't bury the tax liability, it doesn't disappear. You just defer it. And so even though let's like let's take that first scenario, you have $300,000 of tax liability. And if you're doing a 1031, you would have to take that full $300,000 and put that into the next property. Whether you buy a $300,000 property or just a $300,000 down payment, it doesn't matter. As long as you put all that money into the next property, you don't pay taxes on that. But the tax liability doesn't go away. It just defers it into the next property. So you're just keeping it locked. You're keep kind of the same situation. You're keeping it locked up in the property. And then when you go to sell that second property, then you have the same situation. You're gonna have even more tax liability and you need to either 1031 it or pay the taxes on it. So with bonus depreciation, you can actually kill it and stop the stop the tax liability right there and just get rid of it. You bury it and then you know you pull that money out and you're not paying taxes on it now.

SPEAKER_00 40:41

So really with a 1031, if you were to keep doing that over and over again, you'd be snowballing your taxes, right?

SPEAKER_01 40:47

You would be snowballing the tax liability until you die, which we've talked about. You can keep doing that strategy until you die, and then those that tax liability dies with you, and then your kids can sell that property and not have to pay those taxes.

SPEAKER_00 41:00

This is why you said, or like you said, planning. You cannot just do this. It takes last minute. This isn't uh something you're gonna start talking about December 1st.

SPEAKER_01 41:08

But yeah, there are two different strategies that have you know a similar outcome because you're just trying not to pay taxes. One of them is deferring it until you die. The other one is burying it. So it allows you to be able to just kill that tax liability in its tracks. Um and the the thing is you don't have to roll that money over like the 1031. If you were able to get creative deals and buy with zero, let's say you bought something with zero down, you wouldn't even have to use that money towards real estate at all. You could keep all that. As long as you buy a property, you're able to take the depreciation on that. So you you don't necessarily have to roll it over as a down payment. That's just usually what it takes to buy a home.

SPEAKER_00 41:44

So what would you say for someone? Because like you said, you have to be a real estate professional, not a licensed realtor, but a license a real estate professional. What would you say to someone who is not? What are their options? And yeah.

SPEAKER_01 41:56

So I mean, if you're not a real estate professional, it gets a little trickier because you can't take that. If you or your spouse are not, you're not able to use bonus depreciation to offset active income. So you can still use bonus depreciation to offset passive income, but it stays within that passive income because IRS treats passive income and active income differently. So the income that you're making from your investments, like from your, let's say all your rental properties, that's considered passive income, you can still use the bonus depreciation against that. So if you had a bunch of passive income, you could still use this strategy and not even have to worry about a real estate professional. But for us, since we're selling the property, when you sell a property, even though that's a real estate transaction, that those gains are not treated as passive. Those are capital gains, which are basically lumped in with active income. So in order to s offset those gains, the capital gains, you have to be again, either a real estate professional to offset that with bonus depreciation, or you can 1031 it, um or you just pay the taxes, which we don't really want to do. Yeah. So so I mean, the fact that we are heavily involved in real estate and spend a lot of time in it and are able to qualify for that makes this a viable strategy for us.

SPEAKER_00 43:12

When would you say, when you were kind of like looking at this, when would you say does not make sense to sell a property?

SPEAKER_01 43:19

Yeah, I think it doesn't make sense when you don't have a lot of equity. When you're building, you're in build mode, like we've been the last five years and you're just trying to build up that equity. It doesn't, your cause your return on your equity might be might be really if you buy, if you buy a property, let's just say you buy a property zero down, million dollar property was zero down. You have zero equity, but you're getting an income on that. Your return on your investment is actually really extremely high because there's no, you have no money in there. So your your return on investment is is infinite. The more money you make on the property, you're dividing by zero because you have nothing into it. Um, but your return on your equity is also gonna be really high because you have zero equity at that point. Now, as tax Time goes by, you hold that property five, 10, 15 years. Let's say it doubles in in value over 10, 15 years. Now that property is worth 2 million. Now you have a million dollars of equity in there. And so now your return on equity goes way down. Your return on your investment is still good, but the return on equity is now lower. And now you get this opportunity cost that you're missing out on by not redeploying that equity. So I would say somebody that's just getting into properties and hasn't held them very long or doesn't have a lot of equity. Now, with what we do, we push appreciation. So we get there a little quicker because we we do a lot of renovations and we push that appreciation quickly. But when you first get into the properties, there's not a lot of equity. So you're kind of starting at zero. And at that point, like it doesn't make sense to sell because there's no, there's not really much gain. But I think definitely like the farther along you go and the closer you get to doubling the value is when you really gotta start looking at your return on your equity.

SPEAKER_00 44:51

Yeah. Makes sense. So what is something that our listeners can do right now to figure out if their property makes sense to sell or not?

SPEAKER_01 45:00

Yeah, I think there's a few things you should do. One is figure out what your return on your equity is. Look at your equity on each property and figure out what the return is on the equity, not the investment, not the value of the home on your equity. So again, a million dollar property. Let's say if you, you know, you bought it at six hour, let's say you owe $600,000 on it. It's worth a million, you got $400,000 of equity. What is your return on that $400,000? And what does that look like? And then you just got to figure out what could this do elsewhere? If I take this and I redeploy this and buy two or three properties, what do the numbers look like? You know, you do have to consider rates are higher right now. So you might have a rate that's two and a half percent. Maybe it makes more sense to keep it there and just try to keep getting second thirds and try to tap into the equity other ways or a home equity agreement, just ways to tap into that without losing that first position, because that could really help your cash flow and it might not make sense to give that up. But especially if you've got a property that's like, you know, five, six, seven percent, you know, if that's if you're if you're not really losing out on the interest rate right now, it could make a lot of sense to do that. Uh, you know, the other thing too is there are portable mortgages. We talked about portable mortgage mortgages. Some mortgages are actually portable. Um, they're not as common, but there are some portable mortgages. So if you're buying your next property as a primary residence, you might be able to take that 2.87% that you have and apply that towards the next property. And that's a little more complicated and you got to really look into it and find out if your mortgage qualifies for that. But that's one way of doing it. Another thing that's actually not talked about very much is assumable mortgages. So when you're buying a property, if it's uh an FHA or a VA loan or an FDA, those are not as common, at least not in our area. But those are uh assumable mortgages, any FHA, VA loan, anybody can assume that. You don't have to be a VA to assume a VA loan. There is some caveats on the VA side, but the FHA is just anybody can assume it. You still have to qualify for it. But if somebody, let's say somebody bought a couple of years ago and they don't have a lot of equity built up for whatever reason, but they have one of these loans, you could potentially come in and take over that loan. And it's not subject to you, are actually you have to still qualify with the bank for the loan, but you take those same terms that are already in place. So if it's two years gone and there's 28 years left, you still only have 28 years left on that. So you literally just pick up the loan where they're selling. But you would get that same interest rate, same turns, everything would be the same. You may have to come up with some additional money down if they do have equity, because you still got to buy the house out. You're only gonna get that loan for that amount because the terms don't change. But that is a really like strategic tool that I don't think is utilized.

SPEAKER_00 47:41

I was gonna say, why do you feel like people don't use that as often?

SPEAKER_01 47:44

I don't think people know about it. I think it's something that's just not talked about very much. And so I don't think that a lot of uh buyers are aware of that. I think we had some friends that were looking at doing that a couple years ago. Yeah. It was an assumable mortgage.

SPEAKER_00 47:58

And but the mortgage on the house that they're buying has to be assumable, right? Correct. So you so the property, you know, say for instance, one that we're selling has to be assumable. So the buyer coming in, that's the only way they could take that over. Right. Right. So if you don't have an assumable in place, you can't.

unknown 48:15

Right.

SPEAKER_01 48:16

So your loan has to be an FHA or a VA. You have to have a loan that's assumable to be able to pass on. But that's also a selling point, too. You can say, I have an assumable mortgage and the rate is 2.87.

SPEAKER_00 48:26

Wow, why don't people talk about that?

SPEAKER_01 48:27

I I I just don't I don't know why it's I think it's really underutilized. Um but I would say the other part of this, like kind of looking at your situation is also what is your tax plan? You got to figure out what is your tax strategy. You gotta do, you know, timing is important. You don't want to sell that home and create a $400,000 tax liability that you can't mitigate.

SPEAKER_00 48:43

So and like we said, we had so many people saying, like, why aren't you selling? Why aren't you selling last year when this would not have made sense? Yeah.

SPEAKER_01 48:50

I mean, the last few years. It's like we didn't have this opportunity. We would have had to do a 1031 and it wouldn't have, we would have had to roll all the money over and it wouldn't have really helped us personally out because we couldn't redeploy that. We had to put it all back into the next property. So yeah, we might have actually been able to do it. Um, and it might have made sense, and we probably should have looked at it sooner. But now with the bonus depreciation, now we can redeploy, buy more properties, and have tax-free cash that we don't even have to re-invest. It's just cash. So I think that's where the advantage comes in is you're getting tax-free dollars and pulling that out. That's that's the huge advantage to the bonus depreciation strategy. Absolutely. You know, I think what we've been talking about with this strategy, I think most people listening are probably understand the strategy. They probably agree with it, they can see the benefits of it, but most people aren't gonna do anything about it. And we're probably guilty of that the last few years, just building up equity and just kind of getting caught up in that equity trap. But the market doesn't reward knowledge. You know, if you have the knowledge and you know how to do it, it doesn't reward you for that. It rewards action. You've got to take action. So just doing an evaluation on your on your portfolio and seeing where can you redeploy, where can you be better off. You know, if you've got properties that are on your if your return on your equity is like less than 10%, maybe, maybe that's time to to look at to make some decisions, you know, where can I redeploy this? And if I can get 10% on two properties and be better off, or even above that, because remember, your return on your equity is gonna start out higher when you have smaller equity in the home. And you're and as long as you're cash flowing it, that return is going to start out. It's just gonna start out higher because your equity is lower. And over time it gets lower and lower. So you just need to look at it. If you've got stuff that's the return on your equity is under 10%, like definitely dig in and see if it makes sense for sure.

SPEAKER_00 50:45

Yeah. I like it.

SPEAKER_01 50:46

All right. So we will do uh an update on this as we list these property. We're, you know, we're gonna be coming to market in the next few months. So we're gonna know pretty quickly uh what our whole game plan is. But just planning ahead of time, you know, we're we're thinking about the taxes before we're even thinking about the selling. So to make sure that we can mitigate that, because it would generate a massive tax bill, which is why we haven't done this. That's been a big hold up, I would say. Um, but that's that's you know, this is just this opportunity that we have now that we didn't have before.

SPEAKER_00 51:15

So Yeah, I agree. And if you're looking for a house in Costa Mesa, reach out to us.

SPEAKER_01 51:20

Yeah, we got a few of them. All right, guys. That's it for today. Uh anything. Oh, our school community. We are up and running with the school community. We've been doing calls weekly and we take a podcast episode and then dive in on the call and take questions. Those have been really fun for people to kind of get a little more um, you know, related to their situation and find out a little bit more.

SPEAKER_00 51:39

Yeah, I was gonna say that's a really good way to to see how it's actually applicable to you in your life and kind of real life scenarios.

SPEAKER_01 51:47

So it's nice too, because we as we talk about on this podcast, you might be like, oh, that's a good idea. I wonder if I can do that. But it gives people a chance to like stop me, ask questions like, so this or that, can I do that? And we can kind of like dive into their situation a little more. So those have been really fun. But school community is up and running, so you can join that. We'll have the uh link in the the show notes. Uh and then um yeah. Yeah.

SPEAKER_00 52:07

So it's just been And then like always, if you have anyone that might be good, a good guest on the show, we're always open to suggestions um and continue to keep rating us and subscribing and liking and all the Yeah.

SPEAKER_01 52:22

And and with people on the show, we do have some people lined up, but we are we're we get a lot more requests to come on the show than we actually take because we want people that are going to be relatable uh to people that are listening. So we're trying to keep it kind of in the same niche and kind of people that are doing investing, not always real estate, but kind of you know, definitely real estate, more real estate heavy. But we're definitely trying to keep it in staying in the lane. So we get a lot of people that were like doesn't make sense. Yeah, like I know you want to get on a podcast, but that's not like relevant to what we talk about. So we definitely do want to keep things relevant. Absolutely. All right, guys, get out there and make it happen.

SPEAKER_00 53:03

Thanks for listening. This has been a production of Rebuilding the Dream Studios.